Money market mutual funds are coming face-to-face with regulatory changes stemming from the 2008 credit crisis as well as the Securities and Exchange Commission’s concern that these types of cashlike investment vehicles may contribute to market instability in times of stress.
As these changes get fully implemented by mid-October—they were approved back in 2014—some say investors could begin looking for other ways to manage their cash needs, and turn to ETFs instead.
Money market mutual funds are essentially ultra-short-term bond funds that offer investors liquidity—as in quick access to their cash—and a small yield that’s typically more attractive than merely parking cash in a bank savings account.
No More ‘Constant’ Share Price
Among the changes, institutional money market funds will no longer be allowed to have a “constant” share price, but instead will have to have floating net asset values determined by market factors, according to the SEC.
As the commission put it, “With a floating NAV, institutional prime money market funds are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00.”
Money market funds will also have fees and “gates” on the redemption side to avoid what the SEC calls “investor runs.” In other words, investors could be told they can’t redeem their shares for a certain period or be faced with fees for redemptions in times of market stress.
How ETFs Can Benefit
These changes, the SEC says, are designed to mitigate systemic risk, keeping investors from running for the exits all at once in times of trouble. But to some money managers, investors who typically own these types of funds for short-term liquidity and cash needs could find the new rules unsettling.
“We do think there will be asset flow out of money market funds in anticipation of the NAV fluctuation,” said Gary Stringer, president and chief investment officer of Stringer Asset Management. According to him, at least in the short term, “with floating NAVs, money market funds will lose their key advantage, and ETFs should benefit.”
“Most of the initial outflows will come from prime money market funds, as their increased credit risk will likely lead to increased NAV fluctuations,” he added. “Any government funds with money-marketlike durations will benefit, as these assets might be looking for the least possible volatility from both credit risk and duration risk.”
There are three U.S. Treasury ETFs most likely to benefit in the short run: